North Carolina No Longer a Low-Tax State

North Carolina Governor Mike Easley announced yesterday that he wants to prevent small scheduled drops in his state’s income and sales tax rates.

The small income tax cut from 8 percent to 7.75 percent is scheduled in law to take effect in 2008, and the scheduled drop in the state’s sales tax rate from 4.25 percent to 4 percent is supposed to take effect on July 1, 2007. See article here.

Politicians are forever shading what is a tax hike and what is a tax cut, but it’s not too hard for the citizens to judge: if current law calls for a tax rate to fall on a date certain, any action that cancels or postpones that lower rate is a tax hike.

In fact, the lower sales tax rate was supposed to kick in during 2003 after a two-year “temporary” tax hike that was enacted during 2001. The lower income tax rate was also part of that 2001 tax increase and was also supposed to expire previously.

North Carolina is fast becoming a high-tax state in a low-tax region. North Carolina’s state and local tax burden was 10.5 percent in 2006 and ranked 23rd highest in the country. Virginia’s tax burden was 9.5 percent and ranked 41st, South Carolina’s tax burden was 10.2 percent ranked 30th, Georgia’s was 10.4 percent ranked 25th and Tennessee’s tax burden was 8.6 percent and ranked 47th.

North Carolina’s competitiveness is sure to suffer from this persistently high tax burden, but it wasn’t always a high-tax state. As recently as 2000 North Carolina had the 36th highest tax burden at 9.9 percent. Only five states have allowed their tax burden to grow faster than North Carolina these last six years.

Governor Easley would be well advised to allow the temporary income and sales tax hikes to finally expire in order to help a state that is rapidly becoming less and less competitive.

If North Carolina were extracting this regionally high tax burden with simple, efficient taxes, some of the damage would be mitigated. But its complex web of business taxes has given North Carolina one of the worst state business tax climates, ranked 40th in our 2007 State Business Tax Climate Index.